Fuel Economy and Greenhouse Gas Regulation in the United States: Change is Coming Part 5

On August 2, 2018, the US Environmental Protection Agency (EPA) and the National Highway Safety Administration (NHTSA) jointly published the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026. The Joint Notice of Proposed Rulemaking (NPRM) gave much-awaited guidance for future emissions and fuel economy regulation. The NPRM included a 60-day comment period from the date entered into Federal Register (August 23, 2018),[1] and posted to the regulator’s docket on August 24, 2018. The comment period included three public hearings and closed on October 26, 2018 [2]. EPA and NHTSA are to make a final ruling an “undetermined time” after the 60-day comment period ends. In this series, CAR presents a multi-part review of key elements of the proposal and puts the possible outcomes into context.

The Notice of Proposed Rulemaking marks a sea-change in regulation for all U.S. automotive stakeholders. The following are items for consideration as the regulatory process concludes and the implementation begins:

Advanced Propulsion Technology Efficiency and Cost Estimates Matter

For several years, vehicle manufacturers have pushed back against the 2011 and 2016 Technical Assessment Review, claiming the documents drastically under-estimated cost and over-estimated efficiencies for propulsion technologies. Clearly, the regulators listened to the manufacturers in preparing the 2018 NPRM. The NPRM and supporting documents illustrate numerous differences in expectations for efficiency, cost estimates and modeling from previous regulations. This represents an important “win” for the manufacturers, many of which felt the previous modeling was overly optimistic.

Regulatory Certainty Remains Uncertain

Vehicle manufacturers have long contended that it is vital to have regulatory certainty—and have negotiated with California and the federal administration(s) to have some semblance of consistency within the U.S regulatory structure. In the case of the 2018 NPRM, the manufacturers may have gained a position of strength, and appear to be letting the Trump administration lead the negotiations with California. There is a chance that the outcome is (temporarily) a “One National Program.”

The proposed revocation of the California waiver to the 1975 Clean Air Act (specifically, the waiver of the Clean Air Act granted to California) is fundamental to the current discourse and has been challenged in court by California. While manufacturers argue for the importance of certainty for regulation, realistically there has been little certainty in recent years. At one extreme, the current NPRM’s consideration to withdraw the California waiver represents the prospective to move to One National Program by eliminating California’s regulations—Alternatively, in less two years there may be another administration with a very different regulatory vision.

Finally, it is important to consider that the recent appointments to the U.S. Supreme Court may alter the outcome of the waiver. While there are many avenues for resolution of the proposed waiver beforehand, any legal action may end in front of the Supreme Court. A more conservative court may impact decision-making along the way, and at the highest court.

A Technology Island, a Backwater, or a Competitive Return for Manufacturers?

The U.S. automotive market is already different and may become more different than any other major market. As the U.S. GHG/fuel economy regulation appears to be shifting toward less stringency, the opposite is happening elsewhere. China and Europe may define the future of advanced powertrain propulsion leadership. In China, government actions may position that nation as a technology leader in vehicle electrification. Realistically, the Chinese government has policy levers that are not available in many leading countries. Their actions appear to be driven more by industrial policy than environmental policy. European federal governments seem less willing than China regulators to set electric vehicle requirements, but continue to support increasingly stringent CO2 emissions regulation. There is also activity to create zero-emission zones in many larger European cities. These city–led actions will continue to push technology development, and may even impact regulation at the federal level in Europe. The types of vehicles bought in the U.S. are already vastly different than elsewhere (i.e., light-duty pickups and full-size SUVs). Diverging regulations will likely increase that difference, further accentuating the U.S. as a technology island.

The U.S. is already a technology island; it may become a technology backwater. With other countries and regions taking leadership roles in advanced propulsion technologies, the U.S. market may not be considered a place to cultivate advanced prolusion technologies. There is risk that, driven by divergent regulations, the U.S loses electric vehicle leadership to other regions. To an extent, the NPRM addresses the technology backwater issue by offering that if the U.S. market demands advanced fuel economy technologies, companies will be welcomed to sell those technologies—and over-comply. However, if consumers do not pull, the companies will not have to try to sell technologies that are not valued so they will not have invested in unwanted technology.

Currently, U.S. federal regulators show no interest in setting “stretch” fuel economy or GHG standards. The U.S. federal regulators indicate their actions will offer an opportunity for manufacturers to meet consumers’ needs while making a “competitive” profit. Other nations and regions will likely require costlier technology to meet emissions and fuel economy standards. Some suggest this added cost for technology will depress vehicle sales in those markets. Meanwhile, less stringent U.S. regulation may enable a continued trend toward larger vehicles, and all other things constant, possibly a period of strong sales and profits in the U.S.

Suppliers Need Technology Markets

Many manufacturers indicate that the technology pathway for the U.S. market is already in place, and the regulations may have little impact on the products offered. However, market realities suggest that manufacturers will offer technology that the market can support, not what the manufacturers have planned. If there is minimal consumer pull and there is reduced regulatory push for advanced propulsion technology, the likelihood that it is offered is greatly reduced.

Suppliers must walk a careful line in support of more stringent U.S. regulation. Many suppliers have done a remarkable job developing advanced propulsion technologies. And, many suppliers have been actively leveraging more stringent regulatory standards to place increased technology content on vehicles. However, it is also clear that the consumer must find value in fuel economy technologies at least as great as the cost.

Suppliers (and manufacturers) have built business plans on global technology deployment—gaining scale economies by selling advanced technology across many regional markets. The potential loss of the U.S. as a market for advanced propulsion technologies puts added pressure on suppliers. They may be forced to amortize costs over lower volumes and either pass along that added cost to the manufacturers, or negatively impact their profits.

Credits, Flexibilities, and Fuel Consumption Improvement Values Are Fundamental to the Program

The system of credits and flexibilities developed over many iterations now represents a complex web designed to assist individual manufacturers or technology proponents (i.e., electric vehicles, ethanol). Some may argue the 2018 NPRM stands on strong ground when it questions the usefulness of these flexibilities. From a technology neutral standpoint, choosing winners and losers creates inefficiencies. However, many of those credits were fought for by manufacturers and are useful in enabling companies with different strategies to meet the standards.

Automotive manufacturers are facing a pending GHG credit shortfall. Several companies will need to actively trade (buy) credits to remain in compliance until the regulations level off in 2022. The opportunity for manufacturers to carry credits forward and backward will impact the value of those credits.